A “SAFE” approach for medical school debt?

The WSJ Health Blog discusses an approach to medical student debt recently outlined in the American Journal of Obstetrics and Gynecology – the “Strategic Alternative for Funding Education.” Its proponents have apparently learned the first rule of American legislative politics, which is to make sure your proposal has a warm and fuzzy sounding acronym for a title.

The SAFE approach is simple, at first glance. Medical schools would cease to charge tuition and fees up front. Instead, graduates of public medical schools would pay 5% of their gross income, on a post-tax basis, per year for ten years after residency/fellowship completion; graduates of private medical schools would pay 10%. Doctors who suspend their practice during that time would see their payment obligations suspended, and those who cut their hours to below 60% of “normal” would get an extra year added for each year of part-time status. The fourth year of medical school, which receives mixedopinions from those who have actually been through it, could be eliminated if schools so choose.

SAFE’s proponents argue that this approach will remove some of the financial disadvantage of lower-paying specialties (particularly primary care fields), such that interested students will be more likely to pursue those fields. It will also give medical schools an incentive to limit tuition increases to the rate of increase of average physician compensation, instead of the well-above inflation increases we see today. Medical schools would be able to free up funding currently used for financial aid and scholarships, and financial assistance would become a less prominent point of differentiation between schools competing for prospective applicants and students.

The authors of the AJOG article on SAFE provide one set of numbers that’s used to drive some of the math behind the proposal. While these assumptions and the details they propose are certainly debatable (the estimated debt loads seem awfully low, and the estimated salary seems awfully high), that seems a bit premature at the moment. There are a few points about the big picture of the proposal, however, that merit a closer look.

The first is that this proposal might actually do something about upwardly spiralling medical school tuition. As Reason magazine (to pick only one organization) is fond of pointing out (see here, here and here for examples), there is arguably something of a bubble in higher education. Much as a non-trivial reason for escalating medical care expenditures and prices in the 20th century was the moral hazard and demand price inelasticity brought on by increases in health insurance coverage, so too (so the argument goes) does federal support for higher education through subsidized student loans distort incentives, and allow universities to increase their “sticker price” more and more, knowing that needy students will be eligible for government support. Whether this support is on net a good or bad thing is debatable; that it greatly contributes to rapid increases in post-secondary tuition is not.

That’s a plus. What strikes me as the major drawback of this scheme, possibly even a dealbreaking drawback, is that the 5/10% figures are not caps on what physicians would pay, but rather constant percentages. Effectively, this increases the marginal and average “tax” rates on these physicians by that percentage; it’s not a tax in that it doesn’t go to the government, but it affects the incentives to earn all the same. With most US physicians probably sitting in the 33-35% marginal tax brackets as it is (not even including state and local income taxes, payroll taxes, the new Medicare surcharge on high-earners, etc.), a 5-10% increase pushes the marginal rate dangerously close to a level that, psychologically and financially, greatly diminishes the incentive to work/earn more. Throw in state/local/payroll/other taxes as mentioned above, and you’re probably over the 50% threshold in most cases.

If we assume that society wants more physicians working more hours (seeing more patients, etc.), then setting up such a system is probably not conducive to fulfilling that objective. Already we see commentary from older physicians about how the “millenials” are far more worried about work-life balance issues, and are generally not willing to work the hours that their predecessors did. Non-financial workplace issues are a large part of primary care’s unpopularity with medical students. The SAFE proposal may well see more students going into primary care, but limiting their workload so as to avoid these non-monetary hassles as much as possible.

I’ve heard of some law schools establishing similar schemes for students going into low-paying public service jobs. In those cases, the annual debt service payment was limited to a certain percentage of income up to a certain amount. These deals are usually only offered to those students not expected to make as much as their colleagues.

SAFE doesn’t have a “stop-loss,” which leads to distorted incentives as described earlier. Applying it to all students means that the high earners are, in effect, subsidizing the low earners. The authors of the article acknowledge this explicitly, saying

Those students who are financially successful in lucrative specialties will return more financial support to their medical school, whereas those in primary care specialties, public health professions, or charity work will pay less[…]

The ethics of such a redistributionist scheme are beyond the scope of this blog post, though I have no strong opinions either way. I see nothing wrong with having higher earners pay higher amounts in tuition or “post-tuition” (or whatever one would call SAFE payments). However, if society wants more primary care physicians, it seems odd that specialist physicians should be the ones to pay for them via de facto educational subsidies, as opposed to government or society at large.

In sum, while the SAFE system might be a boon to medical students entering primary care fields, and even medical students more generally, it seems to suffer from a few drawbacks that make it highly suboptimal from a public policy and fairness perspective. That said, its proponents should be congratulated for bringing a new approach to the problem of medical student debt. What is particularly praiseworthy is the fact that this proposal would likely force medical schools to quickly and decisively stop higher-than-inflation tuition increases instead of resorting to the tired tactic of throwing more money at the problem, thereby exacerbating the moral hazard problem even further. If major systemic action is taken on this issue in the near future, I hope that this aspect of the SAFE system makes it into the policy mix.